Spinning off pharma R&D

Several Indian generics manufacturers who are looking to expand their original research activities are already trying this. Last week Ranbaxy Laboratories became the third big Indian generics manufacturer to say it planned to spin-off new drugs research and development into a separate company. Dr Reddy's, another big generics maker, recently formed Perlecan Pharma, a joint venture with Citigroup (NYSE:C) and ICIC, India's largest private bank, to finance some of its R&D.

Moving R&D off the main company's books would be a quick way to look more profitable - last year, top drug firm Pfizer's $7.6bn in research costs were equivalent to 40 percent of profits. Ranbaxy's move also comes at a time when it needs more cash. Medicines for Malaria recently backed out of a joint antimalarial project saying the research results were unpromising.

Big pharma says marketing feedback improves R&D but there could be significant benefits to splitting research and sales. An arms-length relationship would allow distributors to be dispassionate about a discovery's potential. Marketing and distribution companies might also find consolidation more profitable because synergies are easier realise in sales than research.

Bermuda-based Celtic Pharma is attacking the same issue from the opposite direction. Celtic picks promising drugs that are entering human testing, funds them through the late-stage trials needed to earn regulatory approval and then sells on the product for manufacturing and distribution. Celtic says it can be ruthless about dropping bad prospects because it has no marketing staff to support.

So far none of the big pharma firms is desperate enough to try such a radical solution, but they should be watching the smaller experiments closely.